If you’re thinking about moving from a limited company to an umbrella company then it’s probably safe to assume you’ve been contracting for some time and have an idea of the advantages that switching to an umbrella offers. Here at Hamilton Bradbury we’ve found that most of the contractors who come to us from limited companies are contractors who have been working for a long time and love who love the freedom and opportunities (not to mention the rewarding pay) that contracting offers. They have also, however, become tired of all the tedious paperwork and admin that comes with running a limited company and are looking for an easier way to manage their work that offers similar rates of return but with other significant advantages. In this article we’ll take a brief look at the main reasons contractors decide to switch between the two working styles and then discuss how to go about doing it.
Five Reasons Contractors Move From Limited to Umbrella
There are all kinds of reasons that people move over from limited to umbrella companies but what is certain is that they are now doing it more than ever. As of last year there were more than 200,000 contractors in the UK working through an umbrella and the numbers are growing year on year. We’ve put together a list of the most common reasons:
(1) Looking for an Easy (Or Easier) Life – This is the main reason that most contractors switch. Limited companies are very quickly losing all the tax advantages that made them worth it in the first place – leaving what? A way of running a business that is all about paperwork, admin, dealing with accountants, HMRC, Companies House and yearly tax returns (and then some!) as well as all the associated hassles of issuing invoices and having to chase clients for payment (and every contractor knows how stressful that can be!) Umbrella companies remove all of that and joining any decent umbrella company means saying goodbye to all that. Here at Hamilton Bradbury for example, we guarantee that from the moment you join us you will never have to do any paperwork, admin or invoice chasing again – bar one timesheet and one expenses sheet at the end of your working week. Our back room staff will take care of everything else, from handling your tax and National Insurance to sending invoices and collecting payment. Contractors switch because they don’t want to be running a limited company when they could be simply working and earning money as a contractor. Why waste time with HMRC, accountants and accounting software when you could be working on your career instead?
(2) Self-Containment & Short-Term Aims – Umbrella companies are not just popular with contractors who are switching mid-career but are also very popular with new contractors. Why? Because they offer a short-term option for workers who wish to dip their toe in the contracting sector and see if it suits without having to go for the full-commitment, limited company option. Umbrella companies are easy to join and easy to leave and therefore perfect for short term commitments. They are also, therefore, perfect in scenarios where a contractor wants to ensure that the expenses and income of one particular contract is ‘self-contained’ outside of their usual arrangements.
(3) Compliance – Another major issue for contractors over the last few years has been the ever-tightening noose around the neck of contractors using tax vehicles of one kind or another. Each and every time contractors have got excited about Employee Benefit Trusts or Managed Service Companies, HMRC have stepped in and closed them down. Over the last three or four years it has become clear that going limited or umbrella were the only two sensible options. Unfortunately however, limited company contractors still live in fear of IR35 legislation and the possibility of an investigation is enough to put most contractors off limited companies. Similarly, new onshore intermediaries legislation regarding false employment currently lets limited companies off the hook on a technicality but it is surely only a matter of time before that is tightened again. However, the 2007 Managed Service Legislation was clear in its intention that umbrella companies were not affected. And why would they be? They are safe, secure and HMRC friendly because they operate through PAYE and NIC’s.
(4) Existing Tax Problems – Many contractors switch before they have closed down their limited companies, needing a different and safe way of working while they deal with a legal or taxation related issue affecting their company.
(5) Personal Issues – A less common reason, but still worth noting is that someone might wish to use an umbrella company for personal reasons. These could be anything from matrimonial issues and the possibility of a divorce to agency contractual commitments to differing profit sharing arrangements.
The Nuts and Bolts of Switching
So, once you’ve decided to make the leap and move over to an umbrella company, what do you do to make it happen? What can you do with your old limited company? How do you go about the formal process of closing down the old company and joining the new one? As you would expect it is the limited company side of things that is going to cause you the most hassle in this process, but then that’s one of the reasons you’re doing it in the first place!
Go Dormant or Close It Down?
Your first decision will be whether you want to make a permanent switch or do it temporarily. If you want to try out the umbrella company option for a while then you will want to simply keep your company dormant. If you already know you are ready for the ‘full umbrella’ then you should close your company down completely.
In order to make your company dormant you need to set a date and then complete all transactions on your account up to that date. Thereafter you should ensure that no more transactions pass through the company. HMRC will need to see that you have stopped trading and don’t plan to look for new business and they will check that there are no new contracts, that you have closed the payroll and that you have paid (or are paying) the outstanding tax you owe. Bear in mind that even bank interest is seen to be a transaction so it is important to close your bank accounts. To stay dormant you will then need to still submit annual returns to HMRC as well as abbreviated accounts and you will need to maintain the registered office address.
Closing Down the Limited Company.
To close down your company you need to get in touch with Companies House and inform then you want to shut down the company. They will then begin their company dissolution procedure, which can take anything from three to six months. At the same time you will need to let HMRC know that your company payroll and corporation tax schemes need to be closed and that you will need to be deregistered for VAT.
Signing On With Your Umbrella Company.
Welcome to the easy bit! Hassle free working is now your privilege and as you would expect, umbrella companies can have you up and running the same day you join. It’s as simple as a phone call and then you can start working, with only a timesheet and expenses form to send them at the end of the week. That’s it!
Of course you will need to choose an umbrella company first but if you have been looking around this site you will know what you need to look for in terms of price and services provided. A final rule of thumb might be to go with umbrella companies that have the words ‘Hamilton’ and ‘Bradbury’ in their name?